Nationwide Ccds Regulatory News (NBS)

Nationwide Building Society

Preliminary Results Announcement

For the year ended

4 April 2016

CONTENTS

Underlying profit

Profit before tax shown on a statutory and underlying basis is set out on page 9. Statutory profit before tax of £1,279 million has been adjusted for a number of items to derive an underlying profit before tax of £1,337 million. The purpose of this measure is to reflect management's view of the Group's underlying performance and to assist with like for like comparisons of performance across years. Underlying profit is not designed to measure sustainable levels of profitability as that potentially requires exclusion of non-recurring items even though they are closely related to (or even a direct consequence of) the Group's core business activities.

Forward looking statements

Statements in this document are forward looking with respect to plans, goals and expectations relating to the future financial position, business performance and results of Nationwide. Although Nationwide believes that the expectations reflected in these forward looking statements are reasonable, Nationwide can give no assurance that these expectations will prove to be an accurate reflection of actual results. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the control of Nationwide including, amongst other things, UK domestic and global economic and business conditions, market related risks such as fluctuation in interest rates and exchange rates, inflation/deflation, the impact of competition, changes in customer preferences, risks concerning borrower credit quality, delays in implementing proposals, the timing, impact and other uncertainties of future acquisitions or other combinations within relevant industries, the policies and actions of regulatory authorities, the impact of tax or other legislation and other regulations in the jurisdictions in which Nationwide operates. As a result, Nationwide's actual future financial condition, business performance and results may differ materially from the plans, goals and expectations expressed or implied in these forward looking statements. Due to such risks and uncertainties Nationwide cautions readers not to place undue reliance on such forward looking statements.

Nationwide undertakes no obligation to update any forward looking statements whether as a result of new information, future events or otherwise.

This document does not constitute or form part of an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration. Any public offering to be made in the United States will be made by means of a prospectus that may be obtained from the Society and will contain detailed information about the Society and management as well as financial statements.

NATIONWIDE BUILDING SOCIETY

RESULTS FOR THE YEAR ENDED 4 APRIL 2016

Nationwide chairman David Roberts said: "These results are a testament to always putting our members first. I would like to thank Graham Beale for his huge contribution to the Society which has left the business in great shape, prospering as a modern mutual and I wish him well for the future. I am delighted to welcome Joe Garner as Nationwide's new Chief Executive. Joe stood out as someone with a deep understanding of the sector, who has championed customer interest throughout his career, and who will set the strategic direction for the Society and our people."

Nationwide chief executive Joe Garner said: "Nationwide has demonstrated that outstanding customer service is the most sustainable path to excellent business performance. It's a credit to the management and people of the Society that they have consistently understood this and organised Nationwide around this principle. As a result, last year we lent more money to help people into a home of their own than since before the financial crisis in 2007. More people are also choosing to manage their money with Nationwide, with over half a million new current accounts opened in the year. And our loyalty accounts and regular savings offering has led to an increase in member deposit balances of £6.3 billion.

"It is my privilege to have been asked to lead an organisation which has consistently demonstrated that it is possible to be successful by doing the right thing. Our mutual status creates an ownership model that allows us to take a long term view and make decisions in the best interests of our members. This, and our talented people, is Nationwide's strength and our opportunity."

KEY HIGHLIGHTS

· Gross mortgage lending up 20% to £32.6 billion (2015: £27.1 billion)

· Net mortgage lending up 28% to £9.1 billion (2015: £7.1 billion)

· Growth in member deposit balances of £6.3 billion (2015: £1.9 billion)

· Expanded current account base with 525,000 new accounts up 12% on 2015

· Net gainer in current account switching - up 38%

· Ranked number one for customer service satisfaction amongst our high street peer group again this year - extending lead to 7.7%1

· Underlying profit up 9% at £1.337 billion (2015: £1.227 billion)

· Statutory profit up 23% at £1.279 billion (2015: £1.044 billion)

· CET1 capital ratio up to 23.2% (2015: 19.8%)

· Leverage ratio improved to 4.2% (2015: 4.1%)

1 © GfK 2016, Financial Research Survey (FRS), 3 months ending 31 March 2016 vs 31 March 2015, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander). Prior to April 2015, Lloyds Bank and TSB combined as Lloyds TSB Group (including Lloyds Bank, TSB and C&G).

FINANCIAL SUMMARY

Notes:

i. Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains/losses on derivatives and hedge accounting as described in note 2 to the preliminary results announcement.

ii. Member deposits include current account credit balances.

iii. Reported under CRD IV on an end point basis. The leverage ratio is calculated using the Capital Requirements Regulation (CRR) definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.

iv. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which are not included on the Group's balance sheet, reflecting the substance of the arrangement. Off balance sheet FLS drawings totalling £8.5 billion are unchanged from the prior year.

v. The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).

Chief Executive's Review

Long term focus drives strong performance

I am privileged to have been chosen to take over as Chief Executive of Nationwide Building Society. Nationwide is an exceptional organisation, one which has consistently demonstrated that it is possible to be successful by doing the right thing.

This success is manifested in the latest set of results, which show strong mortgage lending, strong savings inflows and over half a million new current accounts opened. These figures are the result of a consistent and sustained focus on the needs of our members and customers, through the provision of excellent service, great products and continued investment in the fabric which underpins the Society.

Our underlying profit of £1,337 million is the culmination of our performance over the past twelve months and the member relationships that we have formed over previous years. We stood by our members' borrowing needs through the difficult financial crisis and over the four year period to March 2016 accounted for 36% of net mortgage lending in the UK. Our capital ratios have further improved, are comfortably ahead of current requirements and broadly in line with our best understanding of the medium term regulatory requirements. This enables us to be secure and to invest in the future for the benefit of members today and tomorrow.

As the new Chief Executive my job will be to build on this success. As the results show, Nationwide is not in need of radical reform, but it is an organisation that should constantly challenge itself on ways it can improve and offer an enhanced level of service to its members.

Helping more members buy their own home

Our heritage is in providing support to the UK housing market, and 2015/16 was no exception. Over the year our gross mortgage advances reached £32.6 billion, while net lending amounted to £9.1 billion. These represent market shares of 13.7% and 21.4% respectively, strengthening our position as the UK's second largest mortgage lender. As ever, we have recognised the importance of helping people take their initial steps onto the housing ladder, and over the year we provided finance for 57,200 first time buyer mortgages, one in six of all such mortgages in the UK.

Our mutual commitment to providing consistently good value to all members has been delivered through competitive products and propositions, with no fees for standard valuations on all of our mortgage products, and we continue to provide our best rates exclusively to our existing mortgage members.

We have played a major role in supporting borrowers in the buy to let market, in which we have maintained our position as the second largest lender. As the pattern of tenure in the UK continues to evolve, we believe it is right that we should offer good value, low risk loans to investors who are able to demonstrate their commitment to the rental market. We recognise that buy to let has come under regulatory and political scrutiny in recent times, including significant changes to the tax regime governing mortgage interest tax relief which come into effect from 2017. We pride ourselves on being a responsible lender, and since the year end we have taken a lead by increasing rental cover requirements to ensure loans are affordable, and by reducing the maximum loan to value for new buy to let loans.

Our strategy of offering a range of long term good value products has resulted in us growing our member deposit balances by £6.3 billion. This is despite significant competition at the start of the year from NS&I, offering rates well above those generally available in the market.

In our drive for transparency and ease of access, we have further simplified our savings range and made it easier for members to select the best product for their needs. The vast majority of main savings products can now be opened online as well as in branch, and members can receive email and SMS updates on the status of their savings application. In addition, around ten million members received their annual statement as part of Nationwide's Savings Promises, providing details of all their savings accounts, their current interest rates and the Society's top variable rates. During the year over 760,000 members subscribed to our free SavingsWatch service, which automatically informs them whenever the interest rate on their account changes or Nationwide launches a new savings account.

We understand that low market interest rates continue to pose challenges for savers and, in response, have offered a number of products aimed at rewarding our loyal and committed members:

· Loyalty Bond, which offered our highest two-year fixed rate exclusively for existing members. Over 96,000 accounts were opened, with members depositing £2.7 billion during the four months the bond was available.

· Loyalty Saver, which pays higher rates of interest according to length of membership. Over 100,000 accounts were opened during the year, with over 1.2 million members now holding these accounts.

· Flexclusive Regular Saver, which offers our current account holders a rate of 5% for a year on monthly deposits of up to £500. In the first four months of the offer being available, over 185,000 members opened an account.

More people choosing Nationwide for their current account

I am very pleased that we have opened 525,000 new current accounts in the last twelve months, up 12% on the previous year. This has taken our market share of main standard and packaged current accounts as at February to 7.1%; our strategic aim is to expand this to 10% to provide an effective balance with our established positions in the mortgage and savings markets.

As testament to the quality of our current account range we have been a net beneficiary of customers seeking to switch their account in each and every month since the introduction of the Current Account Switch Service in September 2013. During the past year over 129,000 customers have switched their accounts to us through this service, up 38% on the previous year and representing a market share of switchers of 12.5%.

Our current accounts are complemented by our high quality, good value credit card and personal loan propositions. We issued 186,000 new cards (2015: 196,000), with the attraction of new customers being impacted by the long term balance transfer products which are dominating the market. We continue to reward our main current account customers with the Select Credit Card cashback, which benefited customers to a total of over £15 million in cash reward payments, and also provides them with fee-free overseas transactions. Our strategy is to meet the unsecured borrowing needs of our existing members, and over the year we have lent £1.2 billion (2015: £0.9 billion) of personal loans.

Leading service satisfaction

I am delighted that we continue to be ranked number one for customer satisfaction amongst our high street peer group and our lead over our nearest competitor has increased to 7.7% for the quarter ending March 2016 (2015: 4.5%)2. Over a longer twelve month period we remain ranked number one with a 6.6% lead3.

Our service satisfaction lead is a measure of our performance over the last three months compared to the performance of our next nearest competitor, in our high street peer group. As a result, our lead can be volatile as it is dependent on the performance of our competitors.

Despite our size, we account for only 2% of total industry complaints, and we make every attempt to resolve these to members' satisfaction. When cases do get referred to the Financial Ombudsman Service, 82% of our decisions are upheld, compared with the industry average of 47%.

Building a financially strong Society

As a mutual we aim to optimise, rather than maximise, profit, retaining sufficient earnings to support future growth, sustain strong capital ratios and to allow us to invest in the business to provide the services that our members demand. This will help us to deliver a long term, sustainable business that operates in the interests of our members.

Buoyant volumes and an improved net interest margin have contributed to a 5% increase in total underlying income to £3,333 million (2015: £3,163 million). Our underlying profit for the year was £1,337 million (2015: £1,227 million), an increase of 9%, and statutory profit before tax was £1,279 million (2015: £1,044 million), an increase of 23%. Underlying costs have increased by £170 million to £1,796 million, reflecting the growth of our business, our focus on risk and control and continued investment in new and enhanced products and services. This has resulted in our underlying cost income ratio deteriorating slightly to 53.9% (2015: 51.4%).

Our strong financial performance has resulted in our CET1 ratio increasing to 23.2% (2015: 19.8%). The primary driver of the amount of capital we hold is our leverage ratio, which over the year has improved to 4.2% (2015: 4.1%).

Guidance issued by the regulators during the financial year has given us greater certainty of the expected maximum capital requirements for the Society. This has allowed us to develop a financial framework to assess future performance and maintain our financial strength.

The framework is based on the fundamental principle of maintaining our capital in excess of regulatory leverage ratio requirements. Based on our current assumptions, a level of underlying Group profit of approximately £1 billion to £1.5 billion per annum over the medium term would optimise our ability to invest to support members' needs while maintaining our financial strength.

2 © GfK 2016, Financial Research Survey (FRS), 3 months ending 31 March 2016 vs 31 March 2015, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander). Prior to April 2015, Lloyds Bank and TSB combined as Lloyds TSB Group (including Lloyds Bank, TSB and C&G).

3 © GfK 2016, Financial Research Survey (FRS), 12 months ending 31 March 2016, proportion of extremely/very satisfied customers minus proportion of extremely/very/fairly dissatisfied customers summed across current account, mortgage and savings, high street peer group defined as providers with main current account market share >6% (Barclays, Halifax, HSBC, Lloyds Bank (inc C&G), NatWest and Santander).

Leading employer

Our delivery of great service, great products and great results flows from employing talented and dedicated people and allowing them to make the most of their diverse range of talents. Being a great employer provides a genuine competitive advantage. We pay particular attention to providing a supportive and encouraging working environment, and our success is reflected in our annual employee survey, which continues to show exceptionally high levels of employee engagement and enablement.

Supporting the communities we serve

We have continued to support the communities in which we operate through a broad range of initiatives. The most notable development during the year has been our investment to extend our existing Specialist Support Service for customers affected by cancer; going forward, this will be available for customers facing other life-limiting or long term physical conditions, such as heart disease, stroke and multiple sclerosis. We will phase the roll-out to allow us to gather feedback and refine the service as it is deployed to meet a range of different circumstances.

Outlook

Our financial performance in the period ahead is likely to be influenced by a number of themes in line with the guidance we provided at our half year results:

· clear evidence of more sustained competition within the mortgage market, resulting in further margin pressure during 2016/17

· as a modern mutual we will continue to invest in order to meet our members' current and future needs by providing good, long term value products, services and security

· these two factors combine such that we anticipate profits are likely to moderate in the period ahead.

The continual evolution of technology, changing customer preferences and regulatory change will affect the whole industry, and we will continue to invest to ensure we are able to deliver value to our members and maintain excellent relationships with regulators. The threat of cyber-attacks has increased, and will require ongoing focus and investment as we seek constantly to maintain the resilience of our systems and protect the interests of our members.

Uncertainty surrounding the EU referendum and the global economic outlook are likely to have some impact on UK economic activity in the near term. Our central expectation is that if this uncertainty lifts and the global economy gradually strengthens, UK economic growth will move back towards its long term trend rate of 2% to 2.5% per annum. The household sector is expected to remain a main driving force, underpinned by continued healthy gains in employment and rising real earnings. We expect the housing market to remain resilient, with any dampening of activity from modest increases in interest rates offset by a strengthening labour market and an under-supply of housing.

Nationwide is a unique organisation with a proud history and an optimistic future. We have the potential to build an even stronger Society serving the needs of today's and tomorrow's members, by championing the right thing to do and continuing to deliver tangible service excellence and long term value. We are committed to serving members and the wider society.

2016 Financial Review

OVERALL GROUP PERFORMANCE

Our 2015/16 financial performance has been strong with statutory profit before tax up 23% year on year, reflecting a 7% increase in net interest income, underpinned by our strong operating performance, and an improvement in asset quality with impairments falling 71%.

The underlying cost income ratio has deteriorated to 53.9% (2015: 51.4%) reflecting our investment in new products and services such as Nationwide Now and Apple Pay functionality, our ongoing investment in improving and strengthening our IT infrastructure, increasing sales and service capacity and our response to new regulation.

Total assets have grown by £13 billion to £209 billion at 4 April 2016. This increase is largely attributable to £9.3 billion growth in residential mortgage lending, reinforcing our position as second largest mortgage lender in the UK. The remaining growth is driven by an increase in high quality liquid assets, with the Liquidity Coverage Ratio (LCR) increasing to 142.6% (2015: 119.3%).

Our capital strength has improved during the year through retained earnings and a continued improvement in asset quality. As a result our CET1 and leverage ratios have reached 23.2% and 4.2% respectively (2015: 19.8% and 4.1% respectively), well in excess of current regulatory requirements. We also believe we are well placed to meet foreseeable regulatory capital requirements.

We anticipate that profits are likely to moderate in the period ahead as competition maintains pressure on margins and we focus on delivering value to members, including investment in service enhancements, whilst maintaining our capital strength.

*Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains/losses from derivatives and hedge accounting as described in note 2 to the preliminary results announcement.

Notes:

i. Within the statutory results presented in the preliminary results announcement, bank levy and transformation costs are included within administrative expenses.

ii. Within the statutory results presented in the preliminary results announcement, FSCS costs are included within provisions for liabilities and charges.

iii. Within the statutory results presented in the preliminary results announcement, gains/losses from derivatives and hedge accounting are presented separately within total income.

Underlying profit

Underlying profit represents management's view of underlying performance and is presented to aid comparability across reporting periods.

Underlying profit growth of 9% year on year is largely attributable to our operating performance driving higher net interest income, combined with significantly lower impairment losses. This is partially offset by a reduction in net other income and an increase in administration costs.

*Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains/losses from derivatives and hedge accounting as described in note 2 to the preliminary results announcement.

Net interest income and margin

Net interest income has increased 7% to £3,086 million (2015: £2,872 million) due to a 4% growth in average assets, reflecting a 21.4% market share of net residential mortgage lending in the year, and a 5 bps improvement in NIM to 152 bps.

Interest income during the year reflects our consistent support for the housing market over recent years, providing mortgages to customers over a period when a number of our competitors constrained their lending. In the four years to 4 April 2016, the Group accounted for over one third of net lending in the market.

Savings rates have continued to fall across the industry and this reduction in retail funding costs has underpinned our margin performance. We estimate that our average margin on savings balances measured against relevant market indices (swaps or Bank base rate) was circa 50 bps over the year in comparison to circa 70 bps during the year to 4 April 2015. Notwithstanding this, our savings range has been very competitively positioned throughout the year with savings rates often better than, and sometimes significantly so, equivalent products offered by our high street peer group.

The benefit to NIM of lower retail funding costs has been partly offset by a decrease in mortgage margins. Over the last year there has been increased competition in both the prime and buy to let mortgage markets, resulting in new business gross margins falling by an average of 24 bps during 2015/16. In addition, our Base Mortgage Rate (BMR) balances continue to run off, reducing by £8 billion to £35 billion at 4 April 2016. This attrition reflects the highly competitive new business rates available across the market which have increased switching and redemption behaviours of customers, a trend which is likely to continue into 2016/17.

Whilst our average NIM has increased year on year by 5 bps, the quarterly picture for the 2015/16 financial year shows a downward trend, caused by the repricing of assets described above. Our spot margin at the end of the financial year was 10 bps lower than the rate of 152 bps reported for the year as a whole. Whilst we expect the impact to moderate, we nevertheless anticipate further margin compression throughout 2016/17 as competition is sustained and we focus on delivering long term value to members.

The macroeconomic environment could pose further risks to NIM, in particular sustained low interest rates and deterioration in the global economy, which could lead to a downturn in the UK economy, and could have an impact on the cost of wholesale funding.

Net other income

Net other income has reduced by 15% to £247 million (2015: £291 million). We have chosen to improve our current account and credit card propositions during the period by removing unauthorised overdraft fees and removing fees on our credit card associated with spending above authorised credit limits. Interchange income associated with current account and credit card transactions has also reduced following the introduction of regulatory caps. As a result, despite increasing the number of active current accounts and credit cards, fee income has reduced on these products. Reduction in our general insurance income is largely due to lower profit share following a higher level of claims due to adverse weather conditions.

Gains/losses from derivatives and hedge accounting

Although the Group only uses derivatives to hedge risks, income statement volatility can still arise due to hedge accounting ineffectiveness or because hedge accounting is not achievable. This volatility is largely attributable to accounting rules which do not fully reflect the economic reality of the Group's hedging strategy. Details of fair value gains and losses relating to derivatives and hedge accounting are provided in note 5 to the preliminary results announcement.

*Comparatives have been restated for the reclassification of foreign currency retranslation amounts from net interest income to gains/losses from derivatives and hedge accounting as described in note 2 to the preliminary results announcement.

Total underlying administrative expenses have increased by £170 million to £1,796 million, driven by continued investment in the business. At a statutory level administrative expenses have increased by £141 million to £1,847 million.

Employee costs have increased by £65 million to £736 million reflecting the impact of annual pay awards averaging 3.0% and 2.5% in each of the last two years and higher costs resulting from enhancements to the Nationwide Group Personal Pension Plan. In addition, employee numbers have increased by 3% year on year as the Group continues to build greater capacity to support our members' needs and strengthen risk and control functions.

Other administrative expenses have increased by £74 million to £735 million, driven by increased brand development costs and revenue costs associated with our ongoing commitment to a targeted programme of strategic investment. During the year, this investment has included enhancements in our digital capability, including Nationwide Now, Apple Pay functionality and PayM, IT resilience and investment in core product platforms to meet additional business volumes, and ensuring compliance with UK and European Union regulatory requirements. Depreciation charges have risen by £31 million to £325 million as a consequence of strategic investment in the business.

Transformation costs are significantly lower than the prior year as a result of the successful completion of the integration of the Dunfermline, Cheshire and Derbyshire brands which have resulted in ongoing savings of £20 million per annum. Activities relating to changes in the Group's IT service delivery model have also completed which has enabled the Group to deliver increased investment in the business at a lower cost through the utilisation of strategic partner capabilities.

The cost income ratio, on an underlying basis, has deteriorated to 53.9% (2015: 51.4%) as a result of the growth in administrative expenses described above, which reflects our focus on improving product propositions and services for members whilst remaining strong, safe and secure.

Impairment losses for the year of £73 million are 71% lower than in the year ended 4 April 2015 primarily as a result of an improvement in asset quality and divestment of our commercial lending portfolio.

Residential lending impairment charges of £18 million (2015: £58 million) comprise a reduction in provision requirement of £9 million as a result of moderate house price growth combined with the continued reduction in our mortgage arrears to 0.45% (2015: 0.49%). This has been more than offset by increased provisions of £27 million due to refinements in our credit risk impairment assumptions to take account of the impacts of a prolonged period of low interest rates and the risks attaching to interest only mortgages.

Consumer banking impairments have increased by 8% to £96 million (2015: £89 million). Of this charge, £29 million reflects a reassessment of assumptions embedded within provisioning models across each of the consumer banking products to ensure that they remain appropriate in a low interest rate environment. Excluding these model changes, the underlying consumer banking impairment charge has reduced by 25%, predominantly a result of improving economic conditions combined with improved credit underwriting for personal loans.

Commercial lending impairments relate exclusively to commercial real estate (CRE) lending, with no arrears in our registered social landlords and Project Finance portfolios. The continued improvement in market conditions for CRE, as asset values improve and liquidity strengthens, has driven a high level of provision reversals and recoveries.

Customer redress

We hold provisions for customer redress to cover the costs of remediation and redress in relation to past sales of financial products and post sales administration, including compliance with consumer credit legislation and other regulatory requirements.

The £127 million charge in the period predominantly relates to updated estimates for provisions previously recognised, with £95 million of the increase relating to Payment Protection Insurance (PPI). Of the total charge a significant proportion relates to the cost of administering claims. When assessing the adequacy of our PPI provision we have considered the implications of the proposals published by the Financial Conduct Authority (FCA) in its November 2015 consultation, including the expected impact of the Plevin case. The remainder of the charge for the year is in respect of claims relating to consumer credit legislation.

Financial Services Compensation Scheme (FSCS)

The FSCS charge has reduced by 45% to £46 million, reflecting the Group's expected share of interest costs in relation to the 2016/17 FSCS scheme year and final confirmation of previous scheme year charges. During the year, the FSCS have confirmed that the non-Bradford & Bingley loan was fully repaid and any excess dividends received from the wind-up of these failed institutions will be used to pay the outstanding balance of the Dunfermline capital. As a result no capital costs have been included in the charge.

More information on FSCS is included in note 8 to the preliminary results announcement.

Taxation

The statutory tax charge for the year of £294 million (2015: £205 million) represents an effective tax rate of 23% (2015: 19.6%) which is higher than the statutory rate in the UK of 20% (2015: 21%). The higher effective rate is due principally to the banking surcharge of 8% effective from 1 January 2016, equivalent to £22 million (2015: £nil), together with the tax effect of disallowable bank levy and customer redress costs of £8 million and £7 million (2015: £6 million and £nil) respectively. Further information is provided in note 9 to the preliminary results announcement. 

BALANCE SHEET

Total assets have increased 7% year on year to reach £209 billion at 4 April 2016 (2015: £196 billion). This growth largely reflects increases in residential mortgage lending which grew by over £9 billion as a result of the strong operating performance. This is combined with an increase in high quality on balance sheet liquid assets of £4 billion.

In line with our mutual model, strong retail funding flows have largely supported the strategic growth in retail assets as we continue to introduce attractive savings products to both new and existing members. Member balances have grown by £6 billion, of which £2 billion is attributable to our award winning current account proposition as we continue to demonstrate our position as a modern mutual, improving our market share of main current accounts from 6.8% to 7.1%.

Note:

i. The loan to deposit ratio represents loans and advances to customers divided by (shares + other deposits + amounts due to customers).

Residential mortgages

Residential mortgages include prime and specialist loans, with the specialist portfolio primarily comprising buy to let (BTL) lending. Gross mortgage lending in the period was £32.6 billion (2015: £27.1 billion), representing an increased market share of 13.7% (2015: 13.4%).

Net of repayment and redemptions, mortgage balances grew by £9.3 billion, of which £5.4 billion was prime lending and £3.9 billion related to specialist lending. The loan to value (LTV) profile of new lending, weighted by value, remained at 69% (2015: 69%). Annual house price growth over the financial year was 5.3%, contributing to the reduction in the average LTV of the total portfolio which fell to 55% (2015: 56%). Our residential mortgage arrears have reduced to 0.45% (2015: 0.49%) and continue to be significantly lower than the Council of Mortgage Lenders industry average which stood at 1.04% at 31 March 2016. The performance of our residential portfolios continues to be underpinned by the sustained low interest rate environment and is also now benefiting from broader market conditions, including low levels of unemployment and a return to growth in household incomes.

The level of impaired balances fell by £117 million to £778 million (2015: £895 million) reflecting lower arrears. Impairment provisions have fallen by £8 million to £102 million (2015: £110 million) reflecting strong underlying asset performance, in part offset by refinements in provision modelling assumptions to take account of the impacts of a prolonged period of low interest rates and the risks attaching to interest only mortgages.

Commercial lending

Commercial lending includes commercial real estate (CRE) loans of £3.0 billion (2015: £4.0 billion), a reduction of 25% during the year achieved through deleveraging and repayment. Commercial lending balances also include loans to housing associations of £7.6 billion (2015: £7.8 billion) and a portfolio of loans made under the Government's Project Finance initiative amounting to £1.2 billion (2015: £1.4 billion). The balance sheet total for commercial lending also includes £1.4 billion (2015: £1.4 billion) of fair value adjustments relating to loans where we have hedged associated financial risks, typically interest rate risk, using derivatives which are carried at fair value on the balance sheet.

We have undertaken minimal amounts of new lending during the year, with activity being concentrated on ongoing management of the existing portfolio and with focus on the managed work out of weak CRE exposures. During the year, we have deleveraged over £1.0 billion of non-core CRE loans and we have reduced other CRE exposures by a further £1.0 billion through repayment and managed workout of individual exposures.

The level of impaired balances as a proportion of our total CRE exposure has fallen from 15% to 6%, reflecting deleveraging and resolution of impaired asset positions. Individual provision coverage against impaired balances has fallen from 51% to 32% reflecting the work out of our higher risk cases.

Consumer banking

There has been particularly intense competition in the consumer banking environment in recent months; however the Group has maintained broadly stable balances reflecting our attractive pricing propositions and loyalty offers. Consumer banking comprises personal loans of £1.9 billion (2015: £1.8 billion), credit cards of £1.7 billion (2015: £1.7 billion) and current account overdrafts of £0.2 billion (2015: £0.2 billion). Asset quality remains high as we see the benefit of improved credit policies contributing to the Group's low risk, high quality asset balance sheet.

Further details of our lending and lending risks are provided in the 'Lending risk' section of the Business and Risk Report.

Other financial assets

Other financial assets total £27.8 billion (2015: £22.7 billion) and comprise liquidity and investment assets held by our Treasury Division amounting to £23.1 billion (2015: £18.8 billion), derivatives with positive fair values of £3.9 billion (2015: £3.3 billion) and fair value adjustments and other assets of £0.8 billion (2015: £0.6 billion). Derivatives largely comprise interest rate and other derivatives with positive fair values, taken out to hedge financial risks inherent in our core lending and funding activities.

The increase in liquidity and investment assets reflects both the transition to Liquidity Coverage Ratio (LCR) requirements and an element of pre-funding of wholesale and Bank of England Funding for Lending Scheme (FLS) maturities to de-risk our funding plans ahead of the EU referendum in June 2016. For all these reasons we have taken opportunities to increase both the quality and duration of wholesale funding on our balance sheet over the last year with a consequent increase in liquidity. This has increased the LCR to 142.6% (2015: 119.3%).

Further details of our treasury portfolios are included in the 'Treasury assets' section of the Business and Risk Report.

Note:

i. The wholesale funding ratio includes all balance sheet sources of funding (including securitisations) but excludes Funding for Lending Scheme (FLS) drawings which, as an asset swap, are not included on the Group's balance sheet, reflecting the substance of the arrangement. Off balance sheet FLS drawings totalling £8.5 billion are unchanged from the prior year.

Member deposits

Member deposits have increased by £6.3 billion to £138.7 billion (2015: £132.4 billion) as we continue to offer competitive savings and current account propositions which provide long term good value and seek to support members in the current low base rate environment. The Group has continued to attract inflows from both new and existing members through the introduction of successful products such as our Help to Buy ISA and our range of loyalty regular saver products. We estimate our share of the balance growth in the UK deposit market for the year to be 8.7% (2015: 3.4%). Of this balance growth, £2.2 billion relates to inflows into our current account products as we have increased our market share of main standard and packaged accounts from 6.8% to 7.1%, with in-credit balances on those accounts amounting to £14.8 billion (2015: £12.6 billion).

Debt securities in issue

Debt securities in issue of £36.1 billion (2015: £28.1 billion) are used to raise funding in wholesale markets in order to finance core activities. The increase in outstanding amounts reflects increased issuance activity in the wholesale markets during the year to support increased liquidity.

The wholesale funding ratio has increased to 24.8% (2015: 23.3%), as a result of the wholesale issuance activity.

Further details on the Group's wholesale funding mix and liquidity holdings are included in the 'Liquidity and funding risk' section of the Business and Risk Report.

Other financial liabilities

Other financial liabilities include customer and bank deposits of £15.9 billion (2015: £17.2 billion), permanent interest bearing shares (PIBS) of £0.4 billion (2015: £0.4 billion), subordinated debt of £1.8 billion (2015: £2.1 billion) and derivatives and fair value adjustments of £3.5 billion (2015: £4.0 billion). Derivatives and fair value adjustments largely comprise interest rate and other derivatives with negative fair values, taken out to hedge financial risks inherent in our core lending and funding activities.

CAPITAL STRUCTURE

Notes:

i. Data in the table is reported under CRD IV on an end point basis.

ii. The leverage ratio is calculated using the Capital Requirements Regulation definition of Tier 1 for the capital amount and the Delegated Act definition of the exposure measure.

CET1 capital resources have increased over the period by approximately £0.7 billion mainly as a result of a strong operating performance with £985 million of profit after tax for the period.

Risk weighted assets (RWAs) reduced over the period by approximately £2.3 billion due to reduced commercial RWAs, lower retail unsecured RWAs (resulting from model development) and lower residential lending RWAs as a result of house price inflation, which more than offset portfolio growth.

The movements described above have resulted in an increase in the CET1 ratio to 23.2% (2015: 19.8%). The leverage ratio has increased to 4.2% (2015: 4.1%) as growth in Tier 1 capital has outstripped the balance sheet growth, which has been driven by increases in residential mortgage and liquidity balances.

The Group continues to monitor regulatory developments that could lead to an increased level of capital requirements. Whilst there are a number of areas where potential requirements are yet to be finalised, regulatory announcements during the financial year mean that we have better visibility of expectations for future capital requirements. The Group will remain engaged in the development of the regulatory approach to ensure we are prepared for any change.

We expect to have a steady state leverage ratio requirement of 3.75% from 2019, which comprises a minimum requirement of 3%, a supplementary leverage ratio buffer of 0.35% and countercyclical leverage ratio buffer of 0.4%. The Financial Policy Committee could set a countercyclical leverage buffer up to 0.9%, but has so far set the buffer at 0.2%, which is expected to apply from March 2017. The Group's strategic leverage ratio target of 4.5% reflects its desire to maintain strong levels of capital relative to maximum regulatory expectations (4.25%).

Further details of the capital position are included in the 'Solvency risk' section of the Business and Risk Report.

BUSINESS AND RISK REPORT

Contents

Introduction

This Business and Risk Report explains the Group's business, the risks it is exposed to and how it manages those risks. As the risks of the organisation are managed on a Group basis, and given the dominant position of the Society within the Group structure, the disclosures in the Business and Risk Report are on a consolidated basis covering the activities of both the Group and the Society.

The Group is organised into three business operating segments: Retail, Commercial and Head office functions. The Group is predominantly a retail focused operation which trades almost exclusively within the UK. Wholesale funding is accessed by the Group from both UK and overseas markets.

The chart below shows the Group's business operating segments and how these activities are reflected in its risk measures. The regulatory risk weighted assets (RWAs) below indicate the relative risks each area carries as at 4 April 2016. Please see the 'Solvency risk' section of this report for further details regarding the Group's capital position.

Note: No amounts are shown for market risk RWAs as the Group has elected to set these to zero, as permitted by the Capital Requirements Regulation (CRR) where the exposure is below the threshold of 2% of own funds.

Principal risks

Whilst the Group accepts that all of its business activities involve risk, it seeks to protect its members by managing the risks that arise from its activities appropriately. The principal risks inherent within the business, and the Group's attitude to managing them, are set out below:

The frameworks for the above risks, including associated risk appetite, limits and supporting policies, are reviewed at least annually, and are subject to continuous monitoring by the relevant governance committees.

In addition to the above principal risks that are inherent in the Group's business, the Group identifies, monitors and manages the top and emerging risks that could affect delivery of the Corporate Plan as an integral element of its risk and management strategy. More details are set out the following section.

Top and emerging risks

The Group's top and emerging risks are identified through the process outlined in the 'Managing risk' section, and are closely tracked throughout the governance structure. The Group continues to keep these risks under close observation through risk reporting.

Whilst the Group accepts that all of its business activities involve risk, it seeks to protect its members by managing risks that arise from its activities appropriately. Against this background, during the last year the Group's financial strength has continued to grow and lending performance has further improved with low arrears, reflecting high quality underwriting and management. Risk management activity has focused on strengthening business resilience and managing regulatory and conduct challenges. As a result the Group's top and emerging risks remain largely unchanged and fall within four themes: macroeconomic, cyber attack and business resilience, the changing face of financial services, and conduct and compliance challenges. These themes are outlined further below.

Macroeconomic

The Group's financial position remains strong, with increasing profitability and robust capital and liquidity positions. However, uncertainty both globally and in the UK present two main areas that could affect the Group:

· Sustained low interest rates could impact the Group

If rates stay at the current low rate for longer, this could constrain margins and, although not expected, a move to zero or negative rates may result in changing customer attitudes to savings, potentially impacting the Group's business model.

· A deterioration in the global economy could lead to a downturn in the UK economy

A number of global factors could impact the UK economy, for example, a divergence in monetary policy between Europe and the US, a slow-down in China as well as the referendum on UK membership of the EU. Any slowdown could temporarily affect access to and pricing of wholesale funding or reduce confidence and activity in property markets. A deterioration in the housing market or unwinding of property hotspots, such as London, could affect new business volumes and credit losses in the Group's mortgage portfolios. The Group's exposure in central London, although within appetite, remains an area that is closely monitored.

Cyber attack and business resilience

The Group's strategy is to use new and existing technology to deliver a market leading proposition. At the same time cyber security threats are increasing and this, coupled with the pace of technological development, creates risk across the financial services industry. In particular the Group sees two key areas which pose risks to achieving its goals:

· The increased frequency and sophistication of cyber attacks increases perceived and real exposure

Recent high-profile cyber attacks serve to illustrate the increasing sophistication in this area and also prompt greater regulator and member concerns about security. The interconnectivity of banking and payments infrastructures and links between wider business providers and banking data mean that a successful attack anywhere in the supply chain could impact members and damage confidence in the sector as a whole. This requires the Group to ensure that it can defend against attacks and also detect and respond to any threats.

· Rising customer expectations could exceed the Group's ability to provide a highly reliable and widely available service in an increasingly digital environment

Customer and regulator tolerance for service disruption continues to reduce within the financial services industry and, as the business becomes increasingly digital, the reliance on industry-wide systems is greater. Together these issues increase the risks that:

• planned and unplanned IT outages fail to meet availability expectations, causing financial and reputational damage to the Group

• the failure of an external system could have a detrimental impact on the Group's operations and the service level that customers expect

• maintaining IT systems and infrastructure becomes increasingly time-consuming and expensive.

Changing face of financial services

The Group has delivered significant digital change over the past year, including updates to mobile and internet banking and new payment technology. The branch experience has also evolved with the introduction of digital technology such as Nationwide Now, whilst still offering more traditional products and services that are so important to many of the Group's members. The Group will continue to develop new and existing technology to deliver a market-leading proposition. However, there are a number of challenges from new and changing competition and technology, in particular:

· The Group faces a range of direct and indirect challengers as the financial services industry evolves

For example:

• Traditional banking competitors may pose an increasing challenge to the Group's core markets as the requirement to ring-fence their retail operations leads them to refocus their activities.

• Collectively, challenger banks may impact product pricing, and accelerate changes in customer expectations.

• FinTech firms may also impact product pricing and customer propositions.

· New technology and new models, such as peer-to-peer lending or robo-advice, may mean that customer interactions deviate significantly from expectations

This could potentially mean that:

• The cost of keeping up with widespread technology changes may prove unsustainable and require investment choices that do not match member expectations.

• The economics of branch distribution could be undermined.

• Retail deposit balances may become more volatile due to a combination of digital savings propositions and responses to adverse social media coverage, impacting the business model and placing a strain on short term liquidity.

Conduct and compliance challenges

The Group's culture places conduct and compliance as central to its values and behaviours. The Group's risk governance and control framework drives a strong customer-focused conduct culture at each stage of a customer's interaction from product design, through sales and to post-sales servicing.

The member-focused nature of the Group's business model places it in a good position to meet current and future conduct requirements. However, the following are seen as key conduct and compliance risks for the Group:

· The regulatory landscape is changing

The scale and quantity of changing regulation affecting the industry continues apace. This change needs to reflect innovation in the industry that is designed to meet changing customer demands and behaviours. There is a risk that industry developments proceed ahead of regulatory change resulting in uncertainty and potential delays in the development and launch of products designed to meet customers' needs.

· The Group's digital strategy may not meet the changing behaviours of customers

Customers expect to be able to access products and services at a time, and through a medium, of their choosing. It is critical that these services remain resilient to meet demands and prevent customer detriment. As new channels are developed to meet evolving demands it is essential that fair customer outcomes continue to be delivered.

· The Group's business model may not address the developing needs of its customers

There is a risk that the Group's business model fails to develop to meet the changing needs of customers across their life stages. In particular the Group should ensure that it is able to quickly identify customers who may, at any time during their relationship with the Group, be in vulnerable circumstances.

Lending risk

Lending risk is the risk that a borrower or counterparty fails to pay interest or to repay the principal on a loan or other financial instrument (such as a bond) on time. Lending risk also encompasses extension risk and concentration risk.

This section provides information on the Group's exposure to lending risk arising from loans and advances, together with details of the level of collateral held, and impairment charges raised against these loans during the period. It also provides information about the lead risk factors and key performance indicators for each of the Group's loan portfolios.

The Group manages lending risk for each of the following portfolios:

Maximum exposure to lending risk

Lending risk largely arises from the Group's exposure to loans and advances to customers, which account for 87.3% (2015: 88.8%) of the Group's total lending risk exposure. Within this, the Group's exposure relates primarily to residential mortgages, which account for 90.7% (2015: 89.5%) of total loans and advances to customers and which are comprised of high quality assets with low occurrences of arrears and possessions. The increase in the proportion of residential mortgages reflects the continued growth in mortgage lending and the strategic decision to exit from non-core commercial lending.

In addition to loans and advances to customers and banks, the Group is exposed to lending risk on all other financial assets. For financial assets recognised on the balance sheet, the maximum exposure to lending risk represents the balance sheet carrying value after allowance for impairment. For off-balance sheet guarantees, the maximum exposure is the maximum amount that the Group would have to pay if the guarantees were to be called upon. For loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities, the maximum exposure is the full amount of the committed facilities.

The Group's maximum exposure to lending risk has risen from £207 billion to £220 billion. This is due to the growth in residential mortgage loans described above, as well as an increase in the Group's holding of liquidity assets reflecting the transition to Liquidity Coverage Ratio (LCR) requirements and the decision to pre-fund long term wholesale maturities.

Notes:

i. In addition to the amounts shown above, the Group has, as part of its retail operations, revocable commitments of £8,513 million (2015: £8,081 million) in respect of credit card and overdraft facilities. These commitments represent agreements to lend in the future, subject to certain considerations. Such commitments are cancellable by the Group, subject to notice requirements, and given their nature are not expected to be drawn down to the full level of exposure.

ii. The fair value adjustment for portfolio hedged risk and the fair value adjustment for micro hedged risk (included within the carrying value of the commercial lending portfolio) represent hedge accounting adjustments. They are indirectly exposed to lending risk through the relationship with the underlying loans covered by the Group's hedging programmes.

iii. Off-balance sheet commitments at 4 April 2015 have been restated from £7,570 million to £13,690 million. The original disclosure omitted commitments of £6,120 million which related to customer overpayments on residential mortgages where the borrower is entitled to drawdown amounts overpaid.

Movements in all impaired loans by lending risk segment

The table below shows the movements throughout the year of all loans classified as impaired. The balance shown represents the entire financial asset rather than just the overdue elements.

Note: Loans that were classified as impaired and loans that have transferred into or out of the impaired classification are based on the relevant status at each month end, when compared to the previous month end. Amounts written off reflect cases where the loan has been removed from the balance sheet, for example a residential property repossessed and sold. Repayments reflect payments made by the customer, reducing the outstanding balance.

Residential mortgages

Summary

The Group's residential mortgages comprise prime and specialist loans. Prime residential mortgages are mainly Nationwide branded advances made through the Group's branch network and intermediary channels; all new specialist lending is limited to buy to let mortgages originated under The Mortgage Works (UK) plc (TMW) brand.

Strong levels of new lending across prime and buy to let have seen the residential mortgage portfolio continue to grow, from £153 billion to £162 billion over the year. The geographical distribution across the UK is unchanged and the average loan to value (LTV), weighted by value, is marginally lower at 55% (2015: 56%), attributable to the increase in house prices over the year.

Buy to let lending has accounted for 22% of total new business, up from 18% in 2015, primarily due to the growing importance of the private rental sector for UK housing needs as a whole, reflecting long term economic and social trends. New lending performance was boosted in the final quarter as many investors sought to complete purchases ahead of the imposition of the additional 3% stamp duty for buy to let properties at the end of March.

Within prime lending, first time buyers accounted for an increased share of overall lending, up to 28% compared to 26% in 2015. The Group has widened its offering of mortgages at 90 to 95% LTV, and revised its existing Save to Buy proposition to align to the government's Help to Buy ISA to give first time buyers a further contribution to a deposit. As a consequence the average LTV of new business, the proportion of lending at higher LTVs and the loan to income metric have increased and are likely to continue to do so as the Group maintains its support for first time buyers, whilst remaining within its risk appetite.

Arrears have continued to fall across both prime and specialist lending over the period reflecting the continuing favourable economic conditions and low interest rate environment, supported by a robust credit assessment and affordability controls at the point of lending. The proportion of loans that are more than three months in arrears fell from 0.49% to 0.45%; the proportion of non-performing loans and overall levels of impairment loss also fell. The Group has taken action during the year to increase the provision for losses which have been incurred but not specifically reported at the balance sheet date; this limited the fall in provisions which ended the year at £102 million (2015: £110 million).

In March of this year the PRA issued a consultation paper aimed at strengthening buy to let underwriting standards across the industry. It would require lenders to ensure their approach to affordability includes a provision for the usual costs associated with a buy to let property together with suitable allowances for tax liabilities. This follows changes to income tax relief on buy to let properties announced by the Chancellor in 2015 which are due to be phased in from April 2017 to March 2021. These changes will impact existing landlords and may also impact investor demand as net rental yields are reduced. As tax will be charged on rental income without deducting mortgage interest payments, it is likely to cause a number of investors to move from a basic rate to high rate tax band, and some borrowers may find that the tax charge exceeds the current net profit they make from rent after interest payments.

The Group's buy to let lending continues to benefit from a number of enhanced controls implemented since the financial crisis, including the use of a stressed interest rate when applying interest cover ratio criteria. However the Group recognises that the changes to tax relief will materially affect the cash flow and affordability of many investors, and has taken steps to ensure that buy to let borrowing remains sustainable and affordable for landlords as the tax changes are phased in. The Group has increased its minimum interest coverage ratio (ICR) from 125% to 145% with effect from 11 May 2016, and also lowered its maximum LTV for buy to let borrowing from 80% to 75%. The Group will continue to review its approach to underwriting as the PRA consultation concludes to ensure that asset quality is maintained and new regulations are met.

House prices in London have been outstripping the wider UK market in recent years. The gap between the price of a typical London house and the UK equivalent is at, or close to, record levels, with London houses worth twice as much on average as houses in the UK as a whole. The house price to earnings ratio for London has increased above 11, above its previous pre-crisis peak of 8.3, and rental yields have dropped below 3.5%. Demand in London has in part been driven by the growth in buy to let activity (which is more heavily concentrated in London) and there is a risk that the stretched affordability and yield metrics, combined with a change in economic conditions or reduced investor demand, could cause a correction to house prices.

Exposures in London are controlled through maximum loan sizes for new business tiered by LTV which limit individual exposures, and mean that where prices are higher, higher equity coverage is required. Both prime and buy to let lending is subject to affordability assessments using stressed interest rates (based on a five year forward view) to ensure that lending will remain affordable for borrowers even in the event of an increase in interest rates. The Group has conducted stress tests which demonstrate that even in the event of a reduction in house prices of around 40%, any losses that were to occur would not undermine the Group's capital strength. The Group continues to monitor potential levels of negative equity should three years' of house price increases reverse, and will take steps to control the concentration of lending in London should this become necessary.

The Group is exposed to higher LTV lending (up to 95% for new business) and is a strong participant in schemes designed to support first time buyers, such as the Help to Buy (Shared Equity) scheme where a deposit of 5% from the borrower is supported by an equity loan of up to 20% from the government. The Group believes that these schemes are well designed and offer valuable support to buyers, as well as providing additional credit protection for the lender. The Group controls its risk exposure to higher LTV business and shared equity schemes through a combination of risk appetite limits, credit scoring controls, and exposure limits on large new build development sites.

The table below summarises the Group's residential mortgages portfolio:

Lending and new business

Note: Self-certified, near prime and sub prime lending were discontinued in 2009.

The Chancellor's autumn statement announced that a 3% stamp duty surcharge on buy to let property was to be introduced from April 2016. This triggered an increase in the volume of applications as investors sought to complete ahead of the deadline and has contributed to the proportion of buy to let lending increasing over the period to 18% (2015: 16%) of total lending.

Note: All new business measures exclude existing customers who are only switching products and further advances.

In October 2014, the Financial Policy Committee (FPC) introduced a 15% limit on the proportion of new lending that may be written at income multiples of 4.5 and above. This limit applies to residential mortgages, excluding buy to let. The Group's proportion of new lending at income multiples of 4.5 or higher has averaged 7% (2015: 5%). The increase is principally driven by a higher proportion of lending to first time buyers as the Group continues to support this segment of the market. The proportion of new lending at income multiples of 4.5 or higher is likely to continue to increase but will remain within the FPC limit and in line with the Group's overall approach to lending.

Lending risk

Residential mortgage lending in the Group continues to have a low risk profile as demonstrated by a low level of arrears compared to the industry average. The Group's residential mortgages portfolio comprises a large number of relatively small loans which are broadly homogenous, have low volatility of credit risk outcomes and are intrinsically highly diversified in terms of the UK market and geographic segments.

LTV and lending risk concentration

The Group calculates LTV by weighting the borrower level LTV by the individual loan balance to arrive at an average LTV. This approach is considered to most appropriately reflect the exposure at risk to the Group.

Note: The LTV of new business excludes further advances.

The average LTV of buy to let new lending reduced by 2%. This is due in part to the impact of stricter affordability checks for higher LTV lending implemented in November 2014.

The maximum LTV for new customers is 95%, the proportion of lending greater than 90% LTV has increased to 2% (2015: 1%) as a direct result of the Group's strategy to support the first time buyer market.

Buy to let lending is restricted to a maximum LTV of 80%, with only 4% (2015: 4%) of lending greater than 75% LTV.

Geographical concentration

The value of partially collateralised non-performing loans has reduced to £99 million (2015: £135 million), following the growth in house prices and a reduction in arrears cases.

Arrears

Supported by favourable economic conditions and a continued low interest environment, the arrears performance of both the prime and specialist mortgage portfolios continues to improve. The Group's combined arrears rate of 0.45% remains less than half of the Council of Mortgage Lenders' (CML) industry average rate of 1.04%.

Impaired loans

Impaired and non-performing loans are identified primarily by arrears status. Impaired accounts are defined as those greater than three months in arrears and include accounts subject to possession. Non-performing accounts include all impaired loans and also loans which are past due but not impaired, including any asset where a payment due is received late or missed. The non-performing loan amount represents the entire financial asset rather than just the payment overdue.

Loans on interest only or payment holiday concessions are initially categorised according to their payment status as at the date of concession, with subsequent revisions to this category assessed against the terms of the concession.

The Group holds impairment provisions in relation to both the performing and non-performing segments of the residential mortgage portfolio. Provisions reflect losses which have been incurred at the balance sheet date, based on objective evidence. Individual impairment provisions are assigned to accounts in possession and a collective provision is assigned to all other accounts. For currently performing loans, the provision reflects losses arising from impairment events that have occurred within the portfolio but are not identifiable at the reporting date.

The improved performance of the book has meant that during the period the Group's proportion of non‑performing loans has reduced to 2.0% (2015: 2.3%).

The provision balance has fallen to £102 million (2015: £110 million). This reflects the continued improvement in the quality of the book, evidenced by a continued decline in instances of arrears. However, whilst credit risk metrics have improved, they have reached a level from which the rate of further improvement is likely to slow. In addition, the Group has reviewed and updated its provision models and assumptions to ensure they appropriately reflect incurred losses within the portfolio. Specific areas of focus included interest only loans which are approaching maturity as well as accounts which have recently returned to performing status, supported by the low interest environment. The updates have resulted in provision increases for losses incurred but not identified at the balance sheet date.

The impairment charge for the year reflects both the improved performance of the book and the refinements to provision models and assumptions.

Possessions

Repossession numbers have reduced partly due to the strong performance of the portfolio in the current economic environment, consistent with the low arrears and impairment rates. The Group is also currently reviewing repossession processes which will have delayed possession in some cases and contributed to the drop in volumes over this period. Provisions have been adjusted to ensure they remain adequate in light of this change in process.

Interest only mortgages

The Group does not offer any new advances for prime residential mortgages on an interest only basis. However, the Group has historical balances which were originally advanced as interest only mortgages or where the Group agreed a change in terms to an interest only basis (this option was withdrawn in 2012). The Group manages maturities on interest only mortgages closely, engaging regularly with customers to ensure the loan is redeemed or to agree a strategy for repayment.

The majority of the specialist portfolio is made up of buy to let loans, of which approximately 90% are advanced on an interest only basis.

The proportion of prime residential interest only mortgages has fallen to 14.5% (2015: 17.7%).

Interest only loans which are 'term expired (still open)' are, to the extent they are not otherwise in arrears, considered to be performing. They are included within the 'Repair: Term extensions' category in the renegotiated loans tables on the following pages.

Negative equity on non-performing loans

Note: Collateral is capped at the amount outstanding on an individual loan basis.

The improving arrears position and growth in house prices have combined to reduce the value of non‑performing loans in negative equity to £18 million (2015: £26 million).

Renegotiated loans

Mortgages may be renegotiated in a number of ways, including a change in terms, applying forbearance, or repairing arrears that have built up. Some of these changes are initiated by the customer, where the terms of the mortgage allow a revision to the payment schedule to suit the customer's needs (such as a payment holiday or term extension); other changes are specifically applicable where a customer is in or has been in financial difficulties.

The table below provides details of the current balances of loans which have been renegotiated at any point since January 2008, by region. It is possible for a loan to have more than one category and in the table below both are shown and multiple events are then eliminated.